Thursday, November 7, 2013

Markets slide lower after GDP data & ECB rate cut

The Dow dropped 29, decliners over advancers 5-2 & NAZ sank 41.  The MLP index plunged 6+ to the 448s (an unusually large drop) & the REIT index was down 2 to the 274s.  Junk bond funds were weak & Treasuries saw modest buying.  Oil & gold dipped lower.

AMJ (Alerian MLP Index tracking fund)

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Treasury yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLZ13.NYM....Crude Oil Dec 13...94.34 Down .....0.46  (0.5%)

GCX13.CMX...Gold Nov 13.....1,307.20 Down ...10.50  (0.8%)

  • The euro sculpture is seen outside the headquarters of the European Central Bank (ECB) in Frankfurt, November 5, 2013. REUTERS/Kai Pfaffenbach
Photo:   Bloomberg

The ECB cut interest rates to a new record low & said it would prime banks with liquidity into 2015 to prevent the euro zone's recovery from stalling as inflation tumbles.  The move took financial markets by surprise & the € fell sharply in response.  The ECB had faced intense scrutiny after a shock slump in euro zone inflation to 0.7% in Oct, far below the target of just under 2%.  "We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to 2 percent later on," ECB President Mario Draghi said.  The ECB cut its main refinancing rate by 25 basis point to 0.25%, held the deposit rate it pays on bank deposits at zero & cut its emergency borrowing rate to 0.75% from 1%.  "We have a whole range of instruments to activate before reaching the lower bound ... in principle we could even cut further the interest rate," Draghi said.  Calls from euro zone gov ministers for the ECB to loosen policy to help bring down the € exchange rate had also heaped pressure on the Council, though few expected a move this month.  Draghi said there was general agreement on the need to act but there were differences over when to act.  Draghi reaffirmed the central bank's forward guidance that rates would hold at "present or lower levels" for an extended period & said he saw no threat of broad deflation.  He also said banks would be able to rely on as much liquidity as they needed for longer, with the bank's main refinancing operations to be offered at fixed rate with "full allotment" at least until Jul 2015.

Draghi Cuts ECB Rate to Fight ‘Prolonged’ Inflation Weakness

Jobless Claims in U.S. Dropped to 336,000 Last Week as Forecast

Photo:   Bloomberg

Fewer Americans filed applications for unemployment claims last week, indicating layoffs haven’t picked up following the gov shutdown.  Jobless claims decreased by 9K to 336K from 345K in the prior week, according to the Labor Dept.  The forecast called for a decrease to 335K.  Companies may be feeling more confident as vehicle sales & housing maintain gains & manufacturing shows signs of accelerating.  Fewer dismissals set the groundwork for a pickup in hiring, which is needed to revive the consumer spending.  The 4-week average fell to 348K from 357K in the prior week.  The number continuing  to receive jobless benefits rose 4K to 2.87K.  Continuing claims don’t include Americans who have exhausted their traditional state aid and are receiving emergency & extended benefits under federal programs.  Those job seekers climbed 65K to 1.37M.

Jobless Claims in U.S. Fell to 336,000 Last Week as Forecast

Economy in U.S. Expands at a 2.8% Rate as Inventories Climb

Photo:   Bloomberg

Household purchases & business spending on equipment slowed in Q3, even as a buildup in inventories unexpectedly boosted the pace of economic growth in the US.  GDP rose at a 2.8% annualized rate after a 2.5% in Q2, according to the Commerce Dept.  The forecast called for a 2% advance.  Consumer spending climbed at the slowest pace since 2011 & corp investment was the weakest in a year.  The biggest gain in inventories since the beginning of 2012 risks is holding back production & the economy in the current qtr, which is being restrained by a 16-day gov shutdown.  The GDP estimate is the first of 3, with the other releases scheduled for Dec when more information becomes available.  Inventories added 0.8 percentage point to growth & stockpiles increased at an $86B annualized pace after a $56.6B rate in Q2.  The trade gap & inventories are 2 of the most volatile components in GDP calculations.  A narrowing of the trade deficit added 0.3 percentage point to GDP growth.

Economy in U.S. Expands at a 2.8% Rate on Inventories

Dow futures soared after the ECB rate cut, but the GDP figures cooled enthusiasm of stock buyers.  The total number for GDP growth was better than recent numbers, but underlying strength was lacking.  Inventory buildup can not be repeated every qtr & trade data fluctuates from one qtr to the next.  As a result, markets pulled back.  Meanwhile the goings on in DC are getting uglier by the day.  Obamacare will be a major drag on GDP growth in Q4 & probably into next year. 

Dow Jones Industrials

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